The UK government’s recent budget introduced new rules that directly impact Airbnb hosts. These adjustments, paired with existing tax regulations, mean that both current and prospective Airbnb hosts should carefully review how these changes may affect them financially. This article offers a breakdown of the most relevant new and existing rules and guides for navigating tax obligations — whether you choose to operate your Airbnb under self-assessment or as a business.
Understanding the New Airbnb Tax Rules in the UK
As of the recent budget release, the UK government has made adjustments to tax obligations for short-term rental hosts. These changes primarily address the criteria for qualifying for tax reliefs, the reporting of rental income, and compliance standards. Here’s an outline of the major updates:
Stricter Compliance on Reporting Income: Hosts are now required to report all income from Airbnb rentals accurately. Previously, many hosts could slip through the cracks without declaring all rental income, but HMRC is increasingly cracking down on undeclared earnings. New software-based tools are being used to cross-check and verify income, which means there’s increased scrutiny on what’s being reported.
Revised Criteria for the Rent-a-Room Relief: Traditionally, Airbnb hosts could benefit from the Rent-a-Room Scheme, which allows up to £7,500 of tax-free income when renting out a furnished room within a home. However, new stipulations now require the host to genuinely reside in the property for a set amount of time each year to qualify for this relief. This change targets property owners who rent entire homes without staying in them for a portion of the year, effectively eliminating them from the scheme.
New Digital ID Verification Requirement: The government has introduced a mandatory Digital ID requirement for all Airbnb hosts, which will be enforced in phases. This step is to increase transparency in property ownership and ensure that hosts have a verified ID tied to the property they’re listing.
Mandatory Short-Term Letting Licenses: In some areas, Airbnb hosts are now required to apply for short-term letting licenses, depending on the length and frequency of their listings. While this is implemented more strictly in cities like London, it may eventually expand to other popular tourist destinations in the UK.
Existing Rules for Airbnb Hosts in the UK
In addition to the newly introduced rules, several long-standing regulations continue to apply to Airbnb hosts:
Rent-a-Room Scheme: As mentioned, this scheme allows up to £7,500 of tax-free income if you rent out a room in your primary residence. It’s crucial to note that this scheme applies only to hosted stays, where the host lives in the property.
Furnished Holiday Lettings (FHL): If your Airbnb qualifies as an FHL, it can provide attractive tax benefits. To qualify, your property must be available to the public for at least 210 days in the year and rented out for at least 105 days. Properties qualifying as FHLs benefit from capital gains tax reliefs, and certain expenses can be claimed against rental income. Importantly, FHL income is not subject to National Insurance Contributions (NICs).
Council Tax and Business Rates: For properties rented out exclusively as Airbnbs, you may need to pay business rates instead of council tax. Properties with a rateable value of under £12,000 can qualify for Small Business Rate Relief, meaning there may be no tax to pay at all. However, properties with a higher rateable value could face significant charges.
Setting Up Your Airbnb: Self-Assessment vs. Business Structure
When setting up an Airbnb, you need to determine how best to structure it from a tax perspective. Here are the key differences between operating under self-assessment and forming a business structure, along with the benefits and drawbacks of each.
Self-Assessment
Most Airbnb hosts start by declaring their income through self-assessment as an individual landlord.
Benefits:
Simplicity: Self-assessment is straightforward and doesn’t involve the administrative burden of setting up and running a company.
Lower Administrative Costs: You won’t need to maintain separate financial records beyond the requirements for self-assessment. This simplicity can keep accounting and administrative costs down.
Capital Gains Tax Relief: If you sell a property used as an Airbnb, you may be eligible for certain capital gains tax reliefs, such as Private Residence Relief if you lived in the property for part of the time.
Drawbacks:
Limited Expense Deductions: While you can deduct expenses from rental income, the scope of allowable expenses is more limited under self-assessment compared to a business structure.
NICs for FHLs: Non-FHL income will attract National Insurance Contributions if it exceeds the Class 2 threshold.
Limited Tax Planning Opportunities: Self-assessment provides fewer options for managing tax liabilities compared to a corporate structure.
Operating as a Business (Limited Company)
Some Airbnb hosts, especially those managing multiple properties, may find benefits in establishing a limited company.
Benefits:
Corporation Tax on Profits: Profits are taxed at the corporation tax rate, currently 19%, rather than the higher rates of personal income tax, which could provide tax savings for high earners.
Increased Expense Deductions: Business structures allow for a broader range of deductible expenses, including costs associated with managing the property, travel, and some financing costs.
Limited Liability: By operating as a limited company, you separate your personal assets from your business assets, providing some financial protection.
Drawbacks:
Additional Administrative Work: Running a limited company involves significant paperwork, including filing annual accounts, corporation tax returns, and meeting compliance requirements. You’ll likely need an accountant to manage this effectively.
Higher Operating Costs: Business accounts, payroll, and statutory accounts add to the operating costs, which may offset some tax savings unless you’re operating at scale.
Dividend Tax: If you take profits as dividends, these are taxed at rates between 8.75% and 39.35%, depending on your income level.
Important Accounting Tips for Airbnb Hosts
Record Keeping: Keep meticulous records of all income and expenses, as HMRC may request evidence for deductions claimed. Store receipts, invoices, and bank statements digitally for easy access.
Claimable Expenses: Common expenses that are deductible include cleaning fees, repairs, utility bills, and internet costs. If your property qualifies as an FHL, you may also claim capital allowances for items such as furniture and appliances.
VAT Implications: If your total rental income exceeds £85,000 per year, you may need to register for VAT. This is especially relevant for hosts with multiple properties. Remember that standard residential rents are VAT-exempt, but short-term lets may attract VAT.
Conclusion
With the new tax rules for Airbnb hosts, it’s essential to stay informed and comply with all requirements to avoid unexpected liabilities.
Whether you opt for self-assessment or choose to operate as a limited company, understanding the benefits and limitations of each approach will help you make the right choice for your unique situation. Taking the time to evaluate both the new and existing regulations, and keeping accurate financial records, will provide a smoother experience — and potentially greater profits — as you navigate your Airbnb business under UK tax laws.
If you’re unsure about the best structure for your Airbnb, consider consulting an accountant who can advise on the best approach for your tax situation and help you optimise your financial strategy.